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Author: BlackDane One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 10561  
Subject: Re: Trade deficit Date: 5/27/2001 3:34 AM
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smartaz said:

What a surprise when we go to war with China and then realize we can't have any more stereos, shoes, clothing, or cheap diesel power plants! Right now you can't buy a US made park bench unless it's custom built. We would have to rebuild those industries from scratch.

That is the first time I have ever heard it argued that park benches are a strategic industry.

Some of the posts in this thread are excellent and some repeat merchantilist nonsense discredited by Adam Smith in the 18th century.

I hold these truths to be self-evident:
1 markets clear - the supply and demand for american currency must balance. surpluses and deficits on current account are offset by transactions on the capital account.
2 currency is an accounting fiction used because it is more convenient to use and easier to keep track of than to say "I will pay you 3 Mercedes sedans for 10,000 shares in Cisco." When a German investor buys shares in Cisco from an American the dollars just keep track - payment is actually delivered in goods (this is an over simplification since the German may send the cars to Saudi Arabia which sends oil to the US to pay for the shares or the American goes and has a vacation in Germany but the principle is the same.)

A few years ago the Japanese were running a current account surplus with the States and the US was "paying" for all those cars by selling real estate, golf courses and movie studios to the Japanese are grossly inflated prices. Recently something similiar has happened with high tech stocks with foreigners sending goods to the US to pay grossly inflated prices for high tech stocks that then crashed. The reault: an enormous transfer of consumption from Japanese consumers to Americans and the Japanese left with little to show for it but a bankrupt banking system.

The numbers used to measure and report the deficits and surplus have systematic problems because countries keep better records of what they import than what they export. The result is that if you look at the whole world there is a substantial net global trade deficit. Maybe the Martians are sneaking stuff in?

If you refuse to buy low tech goods from China they have no way to pay for high tech American goods like computers, drugs, software and airplanes.

The pattern of world economic development is one of low skill jobs moving to low wage areas. See an article here http://www.furman.edu/~stanford/textile.htm that talks about textiles moving to New England from England because the United States was a low wage area. There is a saying in biology: "ontology recapitulates philology" - that the development of the embryo recreates the general development of the species and so it is in economics. Textiles is the classic example of an industry with low capital, low wages, and low skills selling into a global market - a perfect place for any country to start its industrialization.

Canada is running a trade surplus with the United States right now because many Canadians would rather invest in the United States than Canada and because we have been paying down our foreign debt. That is not a sign of strength in the Canadian economy or weakness in the American economy.

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